Answer to Question #301429 in Microeconomics for ananya

Question

a. If a large increase in investment increases labor productivity, explain what happens to:

i.Potential GDP

ii.Demand and supply of labor Employment

iii.Employment

iv.The real wage rate

v. Real GDP per person

b. If a severe drought decreases labor productivity, explain what happens to:

i.Potential GDP

ii.Demand and supply of labor Employment

iii.Employment

iv.The real wage rate

v.Real GDP per person

Answer 1

A)

1. Potential GDP will increase as Productivity expands.
2. Demand for labour will increase as the marginal productivity will expand. Also supply will increase since with increase in Productivity the firms will be willing to pay better wages.
3. Employment will increase since the demand for labour will be high.
4. The real wage rates will increase as the firms will be capable of paying better wages.
5. Real GDP per person will increase due to increased Productivity.

B)

1. Potential GDP will decrease as Productivity reduces.
2. Demand and supply for labour will decrease due to reduced Productivity.
3. Employment will decrease as the firms won't be having large marginal productivity.
4. The real wage rates will decrease as the firms capability of paying better wages will reduce.
5. Real GDP per person will decrease due to reduced Productivity.